Before we begin, I have a few preliminary announcements. Members may, if they wish, remove their jackets during Committee meetings. They must turn off, or switch to silent mode, all pagers and mobile phones. There is both a money resolution and a Ways and Means resolution in connection with this Bill. Copies are available in the room. I should like to remind members that adequate notice should be given of amendments. As a general rule, I do not intend to call starred amendments.
Furthermore, this Bill is one of three this Session that has been selected for a further experiment with explanatory statements on amendments. All members of the Committee have been sent a leaflet giving details of the experiment. Copies of the leaflet are available in the Committee room and in the Public Bill Office. Members may also wish to seek advice from the Clerk of the Committee.
As we are still in the early days of taking oral evidence in Public Bill Committees, it might help if I briefly explain what is proposed, so that we can all be clear. The Committee will first be asked to consider the programme motion on the amendment paper, for which debate is limited to half an hour. We will then proceed to a motion to report written evidence, and then a motion—which I hope we can take formally— to permit the Committee to deliberate in private in advance of the oral evidence sessions.
Assuming that the second of these motions is agreed to, the Committee will then move into a brief private session. Once the Committee has deliberated, the witnesses and members of the public will be invited back into the room and our oral evidence session will commence. If the Committee agrees to the programme motion, it will hear oral evidence today and on the morning of Tuesday 19 February, before reverting on Thursday 21 February to the more familiar proceedings of clause-by-clause scrutiny.
(1) the Committee shall (in addition to its first meeting at 10.30 a.m. on Tuesday 5th February) meet—
(a) at 4.00 p.m. on Tuesday 5th February;
(b) at 10.30 a.m. on Tuesday 19th February;
(c) at 9.00 a.m. and 1.00 p.m. on Thursday 21st February;
(d) at 10.30 a.m. and 4.00 p.m. on Tuesday 26th February;
(e) at 9.00 a.m. and 1.00 p.m. on Thursday 28th February;
(f) at 10.30 a.m. and 4.00 p.m. on Tuesday 4th March;
(g) at 9.00 a.m. and 1.00 p.m. on Thursday 6th March;
(h) at 10.30 a.m. and 4.00 p.m. on Tuesday 11th March;
(2) the Committee shall hear oral evidence in accordance with the following Table:
Tuesday 5th February
Until no later than 12 noon
The Confederation of British Industry (CBI); Trades Union Congress; EEF
Tuesday 5th February
Until no later than 1.00 p.m.
Scottish and Southern Energy plc; E.On UK plc; EDF Energy plc; Centrica plc; Scottish Power plc; RWE npower plc
Tuesday 5th February
Until no later than 5.00 p.m.
National Grid plc; Energy Networks Association; The Gas and Electricity Markets Authority; energywatch
Tuesday 5th February
Until no later than 6.00 pm.
British Energy; Nuclear Industry Association; Nuclear Installations Inspectorate; Nuclear Decommissioning Authority
Tuesday 5th February
Until no later than 7.00 pm.
Mr Tom Burke; Greenpeace Ltd; Friends of the Earth; Green Alliance
Tuesday 19th February
Until no later than 11.20 a.m.
Renewable Energy Association; British Wind Energy Association; Sustainable Development Commission
Tuesday 19th February
Until no later than 12 noon
Carbon Capture & Storage Association; The United Kingdom Offshore Oil and Gas Industry Association Ltd; SGBI Gas Storage Operators Group
Tuesday 19th February
Until no later than 1.00 pm.
Department of Business, Enterprise and Regulatory Reform
(3) the proceedings shall be taken in the following order: Clauses 1 to 35; Schedule 1; Clauses 36 to 40; Schedule 2; Clauses 41 to 72; Schedule 3; Clauses 73 to 91; Schedule 4; Clause 92; Schedule 5; Clauses 93 to 97; new Clauses; new Schedules; remaining proceedings on the Bill;
(4) the proceedings shall (so far as not previously concluded) be brought to a conclusion at 7.00 p.m. on Tuesday 11th March.—[Malcolm Wicks.]
Before calling the first member to ask a question I would like to remind all members that questions should be limited to matters within the scope of the Bill and that, in view of the time constraints, both questions and answers should be brief.
In the TUC’s submissions, you said that you are keen to see a carbon price that is set high enough to create a credible and effective emissions trading scheme. Can you give us more detail about what that means? Are you specifically seeking to have a floor price on carbon, so that it should not drop below a certain price per tonne? If so, I would also be interested in knowing the views of the EEF about the views of business with regard to a floor price on carbon.
Paul Noon: Our primary concern is that there should be a mechanism in place that gives certainty that a price will be fixed in the future, rather than agreeing a fixed price at this point. There should be some mechanism at European level that will give the market certainty that there will be a price fixed in the future. I find it difficult to see that you could easily fix a price now that would last for several years.
Philip Pearson: On top of that, the idea of a floor price has some attractions if you look at the history of the price of carbon in phase 1, which soared up to €30 a tonne and then almost disappeared through the floor. The forward price of carbon is becoming interesting, but the Committee might want to ask itself the question we have been asking, “What is the minimum price of carbon likely to drive sufficient technological change to secure climate change objectives?”.
Do you worry that the shadow cost of carbon that has been used by the Government to date is too low, certainly compared to what was envisaged in the Stern review? Do you see anything in the mechanisms recommended in the Bill to do with the renewables obligation that might improve that situation?
Philip Pearson: The banding idea—doubling the renewable obligations certifications for offshore wind and so on—is obviously a key step forward, recognising that one needs to attract investment to the new emerging technologies. The shadow price of carbon is of course not addressed in the Bill, and there are concerns that the shadow price itself is still pitched too low genuinely to drive change. I would not claim to be an expert on how the formula is developed but it looks as if it is based on a predicted successful outcome of total global emissions divided by the cost of interventions to secure such a reduction in CO2; and the answer is £19 a tonne. But it raises the question, “Will policies be successful at £19 a tonne?”. I do not think that they would be.
Paul Noon: Yes, we are broadly supportive. The TUC certainly supports the objective set out in the Bill of sustainable and secure policies; it reflects the evidence that we have been submitting for a time. One of our concerns, however, is whether the market mechanisms that it would put in place would deliver the required mix of low-carbon energy production and how it will operate.
Stephen Radley: What we were looking for from the Bill was for the Government to put something in place that would encourage and facilitate the growth of secure, reliable, competitive low-carbon forms of energy. Largely, it does that. It does some sensible things in terms of the consenting regime for offshore gas, and for storage in liquefied natural gas facilities. There is now a sensible legislative framework for carbon capture and storage and for nuclear power. There are some areas, which we can probably explore in our evidence, where the Bill could go further, particularly in encouraging the development of carbon capture and storage and some of the emerging forms of technology in the renewable energy area. Overall, we broadly support the Bill.
One of the biggest areas of controversy is going to be the mix of power sources that are proposed and, in particular, the inclusion of nuclear power in that mix. How does each of the organisations feel about that? Does nuclear need to be in there?
Paul Noon: At its annual congress, the TUC has carried motions in favour of a balanced energy policy, including a nuclear component. I cannot guarantee that every single affiliate or member of the TUC congress is absolutely sold on that idea: unions have their own views. However, the balance at the TUC has been in favour of all low CO2 generation capacity, including replacement nuclear. That is the policy. We do not, however, see the question of competition between nuclear and renewables in the same way as there might have been adverse competition between nuclear and coal in the 1970s. We have certainly not wanted to replicate that, and so we are in favour of new nuclear build, but also in favour of a big emphasis on renewables. We need as many low CO2energy sourcesas we can get, coupled with energy efficiency as well.
Stephen Radley: We would agree with a lot of that. We see nuclear power as playing a very important part in a very balanced energy mix. It would be unwise to rely on renewable power and clean coal alone to deliver reductions in the carbon intensity of our energy. Similarly, we have great hopes for carbon capture and storage, but that is unproven and is some time away. We are looking for the Government not to prescribe in any way what share nuclear should have; nor do we see nuclear as being in competition with renewable power. The Government’s role in this is to set the framework, provide leadership and send some price signals out to potential investors. Beyond that, it is up to nuclear power to prove it is competitive with other forms of energy.
Is that conclusion based on the fact that you perceive it to be sensible to have a mix of power sources for energy security purposes, or have you come to the conclusion that nuclear needs to be part of the mix because you have predicted how much energy we need and you cannot see how we can deliver those needs without nuclear power? Which of those is it?
Roger Salomone: I think that it is a combination of several factors: one is helping us to meet our emissions targets, which are quite ambitious and quite close. It would contribute to the security of supply. It would also contribute to the affordability of supply in a world where fossil fuel prices are rising.
Stephen Radley: In terms of economic growth, I think that we in this country face greater challenges than many of our partners in the European Union. Our economy has tended to grow faster than theirs, and all the reliable projections suggest that we are going to have faster population growth. The sensible starting point is that economic growth will continue at about the same rate that it has done over the last 20 or 30 years, with some allowance for population growth. Although it is a big stretch, we need to factor in assumptions that we will see a significant improvement in energy efficiency, both in business and in the home. Those are the factors that are driving the projections of our energy needs, which are set out in the energy Bill and which we would largely concur with.
Paul Noon: From our point of view, looking at the energy requirements of the future, we have been very conscious of the capacity that will be lost through the closure of the old Magnox stations—the closure of all but one of the existing nuclear power stations, plus the coal-fired stations, which will also be closed. I am concerned that the new generating capacity, which has been put in place to meet this, should be both environmentally-friendly and secure. That is one of the reasons that brings us to the conclusion that nuclear should be a component, but we also strongly support coal and CCS.
One final question, if I may. Clearly, the Bill has to be even-handed. We believe in fair trade and there can be nothing in the Bill that particularly benefits British industry, but is there anything in it that you might think could be a barrier to British industry providing our energy supplies, as opposed to overseas suppliers?
Philip Pearson: This is almost the $64,000 question: what are the advantages to UK industry of the energy strategy? I did notice that the Secretary of State referred to the green industrial opportunities in his speech on Second Reading, to which the TUC would say, “Absolutely.” But the question obviously is what procurement mechanisms could secure a stronger green future for UK manufacturing? I think that the Committee would need to address that; I do not think that there are any simple answers. The Government had a sustainable procurement task force looking into this very question and it has been urging Government Departments to undertake a kind of UK-favoured procurement strategy, consistent with the EU rules. The TUC has argued elsewhere that we think that this is possible and should certainly find expression through the energy strategy.
It is a huge challenge, and we think that, in the next 10 to 15 years, some of the key issues are the growth of renewables; carbon capture and storage, which is crucially important; and getting the mix right between coal and gas. We think that the mix is wrong at the moment: there is far too much emphasis on the emergence of gas-fired power. We have coal resources and, subject to clean coal technology, that is a direction that we should be going in. All of these options should bring major industrial opportunities, but it needs a lot more thought to secure those advantages.
Roger Salomone: From our perspective, new nuclear-fired capacity and new renewable-fired capacity provide major business opportunities, and a number of reports stress that they do. It really comes down to this: does the Bill provide an attractive environment compared to other jurisdictions for investment in those areas? Is the renewables obligation an attractive regime and is the framework that we put in place for nuclear an attractive regime? It is mainly tied up with that.
Mr. Radley, in your answer to my colleague’s first question, you said there were some sensible things in the White Paper, which—being an old cynic—would suggest to me that some things in that document were not so sensible. Perhaps you and your colleagues could tell us what they are.
Stephen Radley: I do not think that it was so much the case that there were things in the white paper that were not sensible. It is more the case that some things in there need looking at. In particular, if we look at our renewable energy, we need to look at whether—especially for some forms of it—other mechanisms might be more appropriate. We might look at the greater certainty and simplicity provided by feed-in tariffs. We are particularly thinking about this in terms of some of the more emerging forms of renewable energy, such as marine renewables, where we have made very little progress at the moment and there have been very few applications to take things forward.
What we are conscious of is that we need to look very carefully at this, and what we do not want to do is switch from an existing mechanism to another one and actually end up with greater costs, because we have not looked at the numbers properly. What we also do not want to do is introduce uncertainty for investors by actually signalling that the regime may change at a time when they are coming forward to make investments. It is perhaps a little disappointing that the Bill has not looked at creating enabling powers for alternative mechanisms for encouraging the development of new forms of renewable power.
So I take it that your suggestion is that the Government have invested money in one of two types of renewables, when they should have been more diverse in how they were looking at renewables?
Stephen Radley: It might have been sensible to look at onshore wind to start with, because that was clearly the one that was closest to the market. We have now got to the stage, particularly now that we have these extremely stretching targets for renewable energy from the European Union, where we need to look more actively at some of the other forms of renewables; now is the time to start doing that.
Roger Salomone: To add to that, I think that going from the existing renewables regime to the banding is definitely a step in the right direction—looking at technologies more specifically in terms of what their individual needs and deployment characteristics are. Steve mentioned something about marine renewables. We think that, in that case, it might be worth looking at alternatives to the renewables obligation, because one drawback of the RO is that it is a little uncertain; it is not that easy to predict the value of ROCs, or renewables obligation certificates, going forward. In the specific case of marine renewables, where the costs are very unpredictable, if the potential value of investments is also very unpredictable, it might be worth looking at alternatives.
Philip Pearson: To come back on that, we would support that line of argument; the banding of ROCs is obviously an important next step, as was flagged up in the White Paper. We think that that leaves a gap in the promotion of small-scale renewables. We are aware of the arguments against that position—the Energy Minister has indicated concern over interference in the energy market—but the present system is not delivering the pace and scale of renewable growth that this country needs. That was clearly set out in yesterday’s front-page story in the Financial Times.
There is a piece missing in the jigsaw, and that is to assign a portion of electricity to securing a feed-in tariff in the way that has happened in Germany and Denmark— particularly in Germany, where it has been enormously successful with approaching 200,000 jobs in renewables, driven by a support mechanism that we do not have. That could fit in, to drive that part of the renewables market, and it could be made available in the Bill as an enabling power—perhaps time-limited, but available subject to consultation—rather than having to return to Parliament and go through the whole process of a new Bill and so forth. Time is too short. Every year that goes by these targets escape us and the CO2 emissions keep increasing. We think that there is a serious opportunity regarding the feed-in tariff as one of the issues that is perhaps missing from the Bill. We do have one or two other ideas, but that one is particularly important.
The witnesses have almost answered my questions. To be absolutely clear, are both of you saying that we should amend the Bill to provide enabling powers to introduce feed-in tariffs and that that should specifically address marine renewables and microgeneration in the first instance but allow the option for a feed-in tariff scheme to gradually replace the renewables obligation?
But your intention would be that, in particular, microgeneration and marine renewables are appropriate early candidates for feed-in tariffs.
And do you think that that could operate in specific sectors, such as marine renewables and microgeneration, alongside the renewables obligation working in other sectors of the energy market? Do you think that that is feasible?
Roger Salomone: I think that it is feasible, because we had a situation before—did we not?—with the non-fossil fuel obligation working alongside the RO. They dovetailed at the beginning. In some ways, I do not think that it is ideal; you would like to have one mechanism for everything, but it might not be working for certain sectors. Those technologies are not really part of the RO; there is no commercial wind or tidal farm in the RO, for example. You might want to revisit the obligation levels of the RO. That might be part of the review as well.
I wanted to talk about carbon capture and storage and clean coal technology. Before that, can we return to carbon pricing for a moment and talk to colleagues from the TUC about this? It is clear—is it not?—that for new investment in generation, there has to be a high and stable price of carbon in the future? Mr. Pearson, I think, told us that that could be done through the EU emissions trading scheme, the third phase of which will begin in 2012. If we want to make progress on nuclear, however, we have to make some decisions about carbon pricing before that. The nuclear White Paper talks about the European scheme, but it also speculates about the notion of a UK-only scheme before then. How do you think that that would work?
Philip Pearson: A UK-only scheme is not something that we have done any work on. We have moved from a UK-only scheme to a European scheme and have done no thinking at all about reverting to a UK-based scheme. My instinct would be that we are within a European framework and that is where policy needs to be made, especially given that, for phase 3, the European Commission is more likely to allocate by industrial sector than by national targets.
Stephen Radley: For us, the focus has to be on what we can achieve from phase 3 and beyond. Nuclear power plants have a very long lifetime, and that is what investors will look at, as well as the likely price of carbon over the next 20, 30, 40 years and beyond. The primary focus must be on getting ETS right, making it more transparent, getting everybody harmonised and working under the same laws, and ultimately developing something that the rest of the world can buy into. We see that very much as the primary focus and anything UK-specific as a fall-back if we fail to achieve the progress we hope to.
Philip Pearson: Not in themselves. They provide a legislative framework to encourage private investment. In a sense, the proposals in the Bill are a kind of minimum comfort zone. They are absolutely necessary, but they in themselves will not drive forward CCS. Government initiatives, such as the demonstration project, are obviously part of the way forward, but there have been concerns over the pace and scale of that. The TUC is pleased to advise the Committee that it is a member of Yorkshire Forward regional development agency’s carbon capture and storage project, which is hugely ambitious, with the potential to capture 55 million to 60 million tonnes of CO2 from power, steel, ceramics and so on in a regional system. It is difficult, however, to see the connection between such an ambitious project and the Bill. The Bill provides a basic set of rules and regulations, but it will not, in itself, stimulate investment.
Roger Salomone: We agree that what is in the Bill is essential and lays the regulatory foundations. However, in terms of the wider question of whether there are enough incentives out there to encourage CCS to develop in a wider sense, we have the competition project, which is quite narrow, looking at one kind of technology, rather than the industry in the broad sense, and we have the EU ETS, which should be the long-term mechanism, but which is not providing those kinds of signals at the moment. I think that there is a question about whether some kind of transition support could be provided to the industry more widely. We have been discussing carbon taxes, and things like that. The question of what happens to the auctioning revenues at the EU ETS level is also outside the scope of the Bill but is important.
So what more needs to be done to bring forward carbon capture and storage? All our coal plants at the moment are ageing and going to go out of commission. There is a prospect that, unless we can burn coal more cleanly, either via better combustion techniques or post-combustion carbon capture and storage, there will be real problems. What else needs to be done?
Philip Pearson: We are at the stage, with carbon capture, of project development through demonstration and implementation. We are at a stage that requires forms of Government support. This in turn raises the question of where the revenue streams will come from. This in turn, going back to Stern, suggests there should be a carbon price-related revenue stream. The only one available so far is the EU ETS. Carbon capture and storage is a potential candidate to join the EU ETS from 2012, or perhaps sooner if the Government could win that argument. Meanwhile, there is no revenue stream from carbon emissions to support CCS; there could be—you could get it from air passenger duty, which is an environmental tax. You could get it from auctioning revenues from phase 2 of the ETS. The Bill does not have a mechanism, however, to fund through carbon pricing the good extensions on electricity, CCS or offshore gas storage. A number of major restructure projects are still without a mechanism. We have a problem with that in the context of the Bill.
The Bill favours retrofitting for carbon capture and storage. Do you agree that the Government should put their money on that technology, rather than the pre-capture of carbon through reforming the gas? That has the advantage of producing hydrogen, which would kick-start the hydrogen economy.
Philip Pearson: The Bill does not cover this issue specifically. It does not refer to post or pre-combustion capture or regional networks. It just provides for the infrastructure arrangements. What do we think about the pre or post-combustion arguments? We think that both technologies need to be supported as well as the third option—the regional pipeline system, which is being developed through Yorkshire Forward. I do not know whether they will be giving evidence to this Committee, but that is a truly ambitious and exciting project, which is not just about getting CO2 from energy but from steel. Corus is a partner. It is a very important initiative. Again, I think there is a problem on the funding stream. Whichever option you go for, the stream is probably too thin and too attenuated; it needs to be much more intense and broad in its scope.
Roger Salomone: We think that it is disappointing that the competition was not broader. Any kind of technology will come forward and be eligible to take part in that competition. You have to give credit where credit is due. It is good that we got competition in the first place. It would have been nice if it had been more open, because it is always hard to predict which is going to be the most cost-effective and useful technology several decades hence.
May I pursue this a little further. There is a feeling in the industry that the Government have been premature in making decisions about the issue through this competition and that they in fact close down activity that ought to be opened up. Is that your general view at this stage?
Philip Pearson: From the TUC’s standpoint, yes, it is. We have expressed that view through our representatives on the coal forum. We believe that all options should be explored. There is a question about resourcing, and if there are limited Government resources then the Government have clearly made a particular kind of decision. If resources are that thin, you could argue for post-capture, pre-capture or a regional network, if only one of three major options is to be chosen. The trouble is that the CO2 challenge is too enormous to restrict to the development of one option only. The European Union is looking for a dozen CCS demonstration projects by 2012, with some to be in operation by then. The UK was thought earlier on to have the combination of advantages to put forward three or four options of the 12. We have one option over a four or five-year time period, and there should be several pre, post and regional systems over a much tighter timescale.
Can I come to the industry now, because I understand that money is available and people want to go ahead, but they feel that they are being excluded by the way in which the competition is framed, and so forth. Is that fair?
Roger Salomone: I think that people do think that the decision for the competition was premature. For example, we do not know exactly what the competition criteria are right now, but we could have had criteria around retro-fitting and global applications and there could be other important ones such as cost-effectiveness. I do not see how narrowing that down now does the situation any favours.
This is my final question. Do both of your groups believe that amending this Bill to open up that particular aspect would be a good thing? Is that what you are telling me?
Just a brief question on competition in securing infrastructure—following on from the question on how competition might develop carbon capture and storage. Are you happy with the potential arrangements in the Bill to stimulate the development of—particularly offshore—grid transmission arrangements through amendments to the Electricity Act 1989 and the power of Ofgem to develop competition for licences? Or do you think that further action is needed to ensure that the delivery mechanisms for the development of offshore wind generation can be sustained?
Philip Pearson: This is an issue that was discussed recently on the Renewables Advisory Board, where I represent the TUC with a colleague from Unite. Following a presentation from Ofgem, there was fairly general concern about the lack of an effective delivery mechanism for grid extensions to capture offshore wind. Competition was not really thought to be the most sensible way forward: that is not how the grid historically developed. It developed on a “plan and provide” basis. Although most of the board members are from the private sector, my impression was that the “plan and provide” basis of grid extensions was the way forward.
In terms of renewables, we urgently need two things: one is planning permissions and the other is grid extensions. The critical path to securing a major expansion of renewables offshore is grid extension. That is going to take the longest and be very expensive. It needs a funding mechanism and a delivery mechanism, and we are not convinced that Ofgem has the right terms of reference to secure that. It does not make a lot of sense to put this out to competition when the industry is saying that it needs the access lines out there in the North Sea on a “planned and provided” basis. That is the problem. Is the competition going to achieve that? It seems unlikely.
Philip Pearson: I do not know what my colleagues would say, but the obvious answer is to commission the provision of the grid. The Government has a role to commission the provision of these extensions. It may look as if that is an old-style way of providing infrastructure, but we are facing unique sets of issues involving climate change, the renewables challenge, carbon emissions and different energy security priorities than existed 10 years ago. We think, therefore, that a market-based mechanism in itself is probably not the right way forward.
Roger Salomone: Our view is that it is a positive development that we are moving from a piecemeal position now, in which networks offshore are more the responsibility of the developer, and bringing them into the existing regime onshore, where you have recognisable transmission asset owners, and a system-wide operator. That can only be beneficial. You are into the remit of long-term planning that exists, for example, for the national grid. That is a step in the right direction, which should provide more coherence and more planning going forward.
Do you think that the combination of what is in the Bill and the proposed developments in other legislation, particularly the proposed marine Bill, will be sufficient to provide that new framework, or are there other elements to it that you consider necessary?
I apologise if the Committee has covered this while I have been away from proceedings. I think that generating costs are of essential importance here, when we are looking at today’s energy factors and CCS in particular. The last figures that I have available to me show that the generating costs for coal are approximately £29 per megawatt-hour, and roughly £30 or £31 per megawatt-hour for gas. Do you have any fears about rising generating costs, irrespective of the price of carbon, with the introduction of CCS for those technologies?
Philip Pearson: The answer has to be, simply, yes. There are concerns about the on-cost of CCS, but CCS is not just a problem for the UK to address for its own coal-fired generation, which is burning around 60 million tonnes of coal per year. It is a far greater issue; a global question. China completely overwhelms our CO2 emissions from coal. It consumes around 2.5 billion tonnes of coal per year, and rising. We know the numbers on coal-fired power stations. CCS is a global obligation, and we are in a unique forward position to develop it. As I said earlier, we need the funding streams to be in the forefront of this technological development, which is why we felt so disappointed. I know there is a cost question, which is at the heart of your point, but there needs to be a far more ambitious CCS project in the UK than the one we have now, and it would be wonderful if the Bill could succeed in addressing the funding stream issues, as well as the framework issues.
The Bill allows for encouraging a whole range of energy generation, perhaps a new fleet of nuclear, with all the work that goes with decommissioning and the waste disposal related to that. It allows for the opening up of carbon capture and storage; and a whole new approach to offshore and marine renewables, with the Severn barrage and things like that. What is your assessment, both from the TUC and from the employers’ side, of the skills base in this country? Can we actually deliver that range of projects, and what needs to be done to ensure that we can?
Paul Noon: That has been of major concern to the TUC and affiliated unions, and something on which we have had good and constructive engagement with the Government. However, we would like to see many of the initiatives knitted together. A good 80 per cent. of the members of my union are graduates, and it has been a source of some frustration to see the number of engineering graduates in the UK drop over the last 10 years. We talk to company after company that tells us about the problems they have in recruiting graduates. The issues relate not only to graduates; they relate to skills more generally. One of the issues that is raised with us, by the electricity supplying industry in particular, is the attitude of Ofgem and the regulator to the price mechanisms that are there. There should be sufficient capacity for companies in the area to invest in skills, or perhaps it should be mandated that they be required to do so, so that it is not just a question of profitability. There are some very significant concerns. In particular, there is a focus on skills in nuclear, again not only among graduates but at all levels. Some of the things are being brought together in the national skills academy for nuclear that has been established, but there needs to be a greater focus on them.
Stephen Radley: My colleague will in a moment come in on the specific point regarding nuclear, particularly on the inspection side.
I think that in the short term a lot of this is down to the work that the sector skills councils can do in terms of addressing some of the issues, working with the HE sector, and other such factors. But beyond that we need to look a bit wider. What we need to look at particularly is the quality of the teaching of science and technology in schools: whether it is being provided to a sufficient standard, whether we are enthusing people about these subjects and whether they are getting good-quality information about the opportunities that are open to them. There is a big opportunity here in terms of communication: we can say, “If you want to be part of delivering the low-carbon economy, these are the sort of things you could do and these are the sort of qualifications that you need to develop”. I do not think that that message is getting across at all at the moment to people who are making subject and career choices in school, and we need to be much more active on that front.
On a wider point about addressing these skills issues, we are encouraged by many of the recommendations that were made in Lord Sainsbury’s review of science and innovation such as improving the quality of teaching and of careers advisers, and perhaps most important, providing evidence in subject lessons of how science is used in the workplace, in manufacturing today; really building it in rather than providing it as a bolt-on.
Roger Salomone: Can I just add that I think the skills shortage in nuclear is of particular urgency, particularly for the regulators and inspectors who are going to run this new health and safety regulatory function. In light of nuclear programmes potentially starting up in the States, China and other places overseas, there is going to be competition for these very skilled individuals. Education is probably not the answer in the short to medium term, as you cannot train a whole new generation of nuclear inspectors. It is about expediting this process quickly and making the UK an attractive place to work for those in the nuclear industry.
May I explore that a bit further? Are you saying that you believe that the nuclear installations inspectorate does not have sufficient numbers of skilled people to assess reactor proposals of the types that are being submitted to them? And is it a general view within the industry that, if it wanted to invest in and build nuclear, there is enough information out there to make decisions on the cost of carbon, the waste disposal regime and the assessment procedures?
Paul Noon: My union represents all the staff of the Health and Safety Executive, including the Nuclear Installations Inspectorate, and we have fought a long battle to try to improve the pay of our members in the NII. It simply does not have enough people. One of the reasons why it has not had enough people is that pay rates have been uncompetitive. Recently there has been a significant increase in pay for inspectors in the NII. My thought is, though, that that might stop some people leaving rather than bring salaries up to the levels needed to recruit, because the rates are still behind what people can get in other sectors of the industry in the UK, let alone what they could get if they chose to move overseas. So the direct answer is that it is difficult to see the NII, as currently formed, being in a position to properly discharge all the responsibilities that it will need to discharge for new nuclear licensing.
On some of the decommissioning programmes for nuclear and the new nuclear programme, the impact assessment that we have just been given seems to have identified some alarming risks, and one key concern is that there is still a risk that sufficient funds would not in practice be available. In particular, in a company undergoing a restructuring programme, the assets could be diverted and made unavailable to fund the liability. Do both of you think that in the end Government have to be the final guarantor of the costs of nuclear decommissioning and clean-up? Is that the only realistic option?
Stephen Radley: The starting point is that the nuclear industry should be financing itself and that we should be looking to the nuclear industry to pay its full share of all the costs, including operating, decommissioning and waste disposal. The sensible conclusion is that, if facilities are only to be built some time in the future, the costs cannot be predicted with absolute certainty. I do not think that it is sensible, therefore, to try to bolt down the position absolutely that there will be no taxpayer contribution to this.
Paul Noon: From the TUC point of view, first it is right that the regime should be set up in such a way that the industry is required to pay those costs as a guarantee that it always will. As with any other technology, however, there is bound to be a role for Government if it does not. Everything possible should be done, however, to structure it so that it does.
How do you see the provisions in the Bill in those terms? Do you think that it allows for the possibility that you have both identified—that the nuclear industry should pay, but as a last resort the Government could pick up the tab?
Roger Salomone: The main safeguard is probably going to be outside the Bill in the details of these decommissioning plans regarding the risk premium. This is the idea that waste management costs are to some extent unknown. We have not made specifications for this waste-management facility. It seems prudent, therefore, to add a premium to waste and decommissioning costs so that you minimize the risk that the Government will have to pick up some liabilities in the future.
Energy prices have been pretty low for a decade, but now they are rising very steeply indeed and clearly that will have consequences for trade unionists. There is little in the Bill about fuel poverty. Should there be and what should it be?
Philip Pearson: It is a kind of elephant in the room as an issue because the increase in the number in fuel poverty back up to 4 million-plus is unacceptable. It is of great concern to the TUC. The Bill should, in our view, make provision for the mandatory introduction of social tariffs. There is no logic in the poorest in the country and the elderly paying the highest energy prices through fixed-price metering. We would want the Government to change position and give themselves the option to regulate for the mandating of social tariffs so that the big six energy companies know exactly what the minimum threshold is.
We have a minimum wage in this country. It is not a voluntary system that big companies can opt in or out of. We think there should be a minimum provision of social tariffs provided for in the Bill. In addition, we think it would be helpful if the Government gave themselves powers to introduce smart metering to accelerate the introduction of such tariffs. Those two mechanisms will not deal with the income issue, which is a major driver of fuel poverty, but they will significantly help the payment issue for those on the lowest incomes.
Stephen Radley: To some extent, we cannot come to a full judgment on smart meters until the full cost-benefit analysis has been done. That work is proceeding at the moment, and we are anxiously awaiting the numbers. Without pre-judging what that says, we do see smart meters as a big opportunity both to improve energy efficiency in the homes where we have made limited progress so far and also in terms of business opportunities for UK companies.
Depending on what the numbers say, we need to look actively at how we can encourage the deployment of smart meters. This may be in the form of some kind of cost sharing between the suppliers and consumers. We probably also need to look at the issue of overcoming the up-front costs that would be involved in purchasing the smart meters, if it fell on the consumer. We are open-minded to some extent because the economics are still uncertain, but this is something the Government should be looking at very actively.
What is your view on security issues? We hear a lot about security of supply from overseas countries, and our exposure to destabilisation in that respect. Is there enough in the Bill to address the concerns about a decommissioning programme, a nuclear build programme and a uranium enrichment programme, to say nothing of offshore renewable farms and oil and gas pipelines and so forth? What is your view of the security aspect of all this?
Paul Noon: Our main concern has been about over-reliance on imported gas. That has been a feature of submissions that we have been making for some time. There seems to be more recognition of that as an issue, although I could not say whether it is fully reflected in the Bill. One of the reasons why we have argued that there needs to be a nuclear component and that we need to develop CCS is that it is a domestic supply, and that is very important to us.
I am aware of that. That was not really my question. I prefaced my question by saying exactly that. My question was about security surrounding the decommissioning of nuclear installations, the commissioning of new installations and offshore wind farms, oil and gas within our own area, not about bringing in supplies from overseas.
Paul Noon: I am afraid I cannot answer at all about offshore facilities. In terms of the nuclear industry and nuclear decommissioning, I can say, from the direct observation of many members who work in that area, that there is a very, very strong emphasis on all aspects of security. We do not have concerns in that respect.
Roger Salomone: We would agree that there is a relatively robust regime in place at the moment for nuclear installations, and I think the decommissioning plans between nuclear operators and Government, which will be a feature of the new Bill, could go some way towards strengthening that by adding more detail.
The decommissioning costs of nuclear as an electricity generating source are fairly well understood by the industry and by people all over the world. I think that is beyond any meaningful doubt. Do you believe that the Bill does enough to make provision for those other electricity and energy generating sources—such as the oil, gas and coal industries—to cater to their own decommissioning costs and the management of their intergenerational waste, including, in the case of those three energy producing sectors, radioactive waste?
Can I just take Mr. Pearson back to the elephant in the room, which he described to us? Fuel poverty and smart metering, which were in the energy White Paper, are noticeably absent in the Bill. Given that there is a degree of sclerosis, with industry wondering whether it can have a nationwide roll-out, do you have concerns that there is not enough direction, and, indeed, that interoperability might be compromised if people just roll this out in small areas without a comprehensive process being put in place?
Philip Pearson: Our colleagues from the EEF have already indicated the industrial opportunities that would come through an ambitious smart metering programme. Where would the meters be made? Could we ensure that they were procured in the UK? There are pilot studies going on. Frankly, we believe that we need to move rapidly from pilot to full-scale implementation. It would be a very popular measure, it would be a way of saving money, and a way of promoting UK industry. We believe that the Bill should contain enabling powers, and that that should be followed by consultation and rapid deployment. You may hear evidence from other organisations, such as Energywatch, in support of this—which seems to us to be a very rational way forward—and of getting it done quickly.
Do you believe that, while it may help people manage the amount of fuel they use, it may also, particularly with pre-payment meters, help to alleviate fuel poverty by possibly switching people to smarter tariffs?
I have a brief question specifically on gas storage. You will be aware, and those of you from the EEF particularly will be aware from your members’ perspective that two years ago we nearly ran out of gas, and that a huge price hike did tremendous damage to much of British business. Since then, the situation has changed significantly. A pipeline has opened up, and we have new liquid natural gas facilities, but there is still a need for improved gas storage facilities. Is it your perception that the measures in the Bill will do enough to provide sufficient new gas storage, or does more need to be done?
We support it as an idea, but it must come with sufficient resources to be effective. That is the only question in our mind. We believe that the Health and Safety Executive is well placed to do that but, like everything else that the Health and Safety Executive does, it needs priority to do it effectively.
If Members have no further questions, I thank our first set of witnesses for appearing in front of us, and call the next set of witnesses.
We will now hear oral evidence from npower, E.ON, EDF Energy, Centrica, Scottish Power, and Scottish and Southern Energy. I welcome the witnesses, and perhaps you would like to start by introducing yourselves, starting with Dr. MacLean.
Thank you all. Before calling the first Member to ask a question, I remind all Members that questions should be limited to matters within the scope of the Bill, and that, in view of the time constraints, both questions and answers should be brief.
You will know that last year the Government talked about legislating for social tariffs, and that not legislating was conditional on action by you on social tariffs. We have all received letters from you telling us the wonderful things you were doing about social tariffs, and I hope that in your response you will not simply list them, because we are familiar with them. Can I put a proposition to you that essentially it is not your job to do the Government’s work for them, that you are in business principally to make money, and that although you spend a few million here or there on social tariffs, it is entirely peripheral to what you do and in the scale of your operations is miniscule? Therefore, if the Government want to achieve the social objective of social tariffs, they should do so by legislation. Having little chats with you and threatening you has failed to deliver, especially even with what is happening with fuel poverty. Is that a fair characterisation?
Dr. MacLean: I do not think that that is a fair characterisation. In part you are correct in that the problem is a complicated one, that poverty is one of the key factors and that it is not something that we can deal with. But the fuel part of the problem is something that we can do a lot about, and we spend not millions but billions on energy efficiency measures, both measures included in Government schemes and voluntary ones. We believe that that is the right approach, because the measures actually cure the problem rather than treating the symptoms. They provide a permanent opportunity to create warm, dry homes that require very little fuel and therefore become almost independent of its price. We believe that that is a big role that our company can play. However, we have to recognise that there are severe limitations when it comes to the income side of things.
Finally, the work that we can do would be an awful lot easier if we could find a better way of targeting those who really are needy, either working together with Government or looking at some form of agency that will deal with that issue so that the help goes where it is needed: that we find those properties that we can treat and those people who are most in need of benefits, which they are often not even claiming.
Sara Vaughan: That is right. We view fuel poverty as a complex issue; it does not have a single solution. Something like a social tariff might seem like an easy answer but it is not as easy as it seems. If, for example, you set a tariff at a particular level, who then is going to deal with it when the prices go up? Who is going to deal with the hedging of that tariff? How is the pricing of it going to work? Are you, by virtue of putting in place a social tariff, going to undermine the customer’s engagement with the market, with the sorts of sustainable solutions that Keith referred to in terms of energy efficiency, insulating their homes and moving forward in a more sustainable way to engage with the market? Are you even going to take away those customers’ chances to engage with the competitive market by virtue of just putting in place a social tariff? The targeting point is an important one as well; it is difficult to target.
I imagine that you would all like to come in on this point but we probably will not get very far if you do. However, I would like to follow that up. Clearly we want people to shop around but the evidence is that low-income households, unemployed families and lone parents are the least likely to shop around, so if we want to protect them, I do not think that we can rely sufficiently just on them shopping around. Given that there is considerable variation among the companies represented here in the proportion of turnover you spend on subsidising social tariffs, are customers not vulnerable? If they are with the worst of you—the company with the least good social tariff that spends the least on such subsidies—and they do not shop around because it is complicated and difficult, are they not at your mercy and would it not be better to legislate minimum standards, which need not be over-prescriptive? Would that not be the best way to protect the customers? Perhaps someone who has not responded yet could reply.
Guy Johnson: We have a number of programmes that are not specific to our customers. We operate, for example, a health-through-warmth programme that is by no means tenure specific; it is open to all customers, not just the company’s customers. I would add to Sara’s point in that much of that work is not about direct giving necessarily—although there is an element of direct giving, particularly in dealing with debt or debt forgiveness, which is a direct cost. But the other element is working with primary care trusts and local authorities and establishing a process of communication. What we have delivered through that is something of the order of £30 million of benefits, through establishing communication—whether direct line communication or communication in home. That is an important part of the programme that we have for vulnerable customers and is perhaps, as Sara says, something that one would lose if it became a central social tariff.
Can I move on to the question of clean coal carbon storage and the possible relationship between that and extending our North sea energy resources? I know that two of the companies you represent were excluded from the competition and were very disappointed. But I understand that you are still going ahead with working on the technology and producing a plant that could help us in the ways I described. Can you say something about that please?
Barry Neville: Yes, I will happily come in on that one. We are looking at an 800 MW plant in Teesside, in the north east, which would be pre-combustion. We were disappointed with the Government’s decision on competition, and we believe they have taken the decision too early to go for pre or post-combustion. More to the point, if we are going to meet these very stringent carbon targets, we need to look at all the options—pre and post. However, I have to say that, at the moment, the economics of it, without any assistance, do not look very good. We therefore need to look at some other measures, even if they are outside the competition that the Treasury has established.
It all comes down to money and support, and I would say that every new technology had support— be it nuclear, offshore oil or gas in its early days, or even onshore or offshore wind, and CCS is not seen as anything different. What we would suggest are ways around that, such as first-of-kind support, capital grants or even—if you look at post-2012 when there will be more revenue from auctioned allowances from emissions trading—recycling the money from a green tax back into developing green technology. So I think there are ways around the problem, and we are trying to remain optimistic about the plant. However, as for going forward as things stand, the economics do not really add up.
Dr. MacLean: We were in a similar position, and probably more advanced than most in the scheme at Peterhead that we were working on with BP. We were particularly disappointed at the time that it took to get to the decision point because an awful lot of time and effort went into getting to that position. Then we thought the restrictive decision that was made to cut out pre-combustion approaches was unnecessarily limiting. We hope that there will still be scope for further projects. We feel that if we are putting in an infrastructure to deal with the carbon dioxide from post-combustion plant, we should look at whether there is an opportunity to do some pre-combustion work to benefit from the investment that will have already been made in equipment and storage facilities for the carbon dioxide. We encourage the Government to consider further support mechanisms for additional carbon capture and storage work.
Sara Vaughan: Can I speak not for post-combustion, but for one of the companies that intends to put a power station into the competition for post-combustion? Our view is that post-combustion was the rational choice for the Government to make, in light of, for example, the situation in China where so many coal plants are being built. We also believe that pre-combustion has a role to play and should be available to the market, and that may turn out one day to be the preferred economic option. For that reason, although we are supporting post-combustion in the UK through the competition, we are actually supporting a pre-combustion plant in the US with a FutureGen project. We think that there is room in the market for both.
Guy Johnson: As someone who has benefited from the ambit of the competition, my concern is that the competition—for which we are trying to pre-qualify—should not be the be-all and end-all. We hope and expect that the Government will continue to review this situation, because there may well be a need, notwithstanding the competition, for even post-combustion to be looked at in terms of what could be done to incentivise the research aspect. I am talking only about the research aspect here, and not things beyond that stage.
Does that mean, in terms of my previous question, that you would want to see that issue opened up in the Bill at this stage? Do you think it important to do so given our energy needs?
Guy Johnson: From our perspective, we think the terms of the competition are appropriate. Fundamentally, the Government need to say what they are buying in a procurement; otherwise it will be a very muddled process that, logistically, will not work. We think the Government made the right choice at this time for this competition, because of the retrofit opportunities in the UK and the opportunities in China. It is no surprise, given what I have just said, that we are entering the competition. I do think, however, that there is an unbridged gap between the competition and the day when there will be a sufficiently robust carbon market to keep carbon capture and storage going, as it were, of its own volition. Whether the Bill is the right place to put that bridge in place, or whether it should be done subsequently, is an interesting question, but it certainly needs to be done.
Sara Vaughan: Thank you, first of all, for your defence. The position on CCS is that Kingsnorth was always intended to be built to be carbon capture ready. There has absolutely never been any doubt about that. In respect of the competition specifically, we would be looking to enter a unit at Kingsnorth into the competition.
Following Brian Binley’s point, what will ultimately drive carbon capture and storage and all the new technologies is a high and stable price for carbon. In the nuclear White Paper, there is a curious phrase that says we would prefer a European scheme through the ETS. The White Paper did, however, speculate that, in the short term, there might be a national scheme. What are your views on that? I know that EDF is very active on this, Mr. Linford, because if you want to bring new nuclear on line by 2019, you have to make some investment decisions fairly quickly.
Denis Linford: The carbon price is set in the market created by the ETS scheme, so there is a market. We have always believed that to create a long-term carbon price, you need to strengthen the EU ETS, and make it into a longer-term, more predictable scheme. The EC has recently published a review of how the ETS will be strengthened post-2012, and that is clearly a good start in strengthening the carbon market in the long term. We are at the stage, I suppose, of considering to what extent that strengthening will provide the strong carbon price signal that we need when it comes to making an investment decision. We are in the analytical stage of seeing how that will work.
Can I switch to the point that Steve Webb was pursuing on the social tariffs? Unfortunately, Mr. Neville, we did not get a chance to hear Centrica’s view, but I think that I am right in saying that you probably do more in terms of social tariffs than any other company. That puts you at a competitive disadvantage, does it not?
Barry Neville: You are right. Our social tariff has been extended to up to 750,000 customers. That is above and beyond the £10 million energy trust that we have already established and we have put £10 million more into that. We have done that on the back of three winter rebates that we gave to vulnerable customers. We believe in a social tariff, but there is a question about how we get there.
We are in favour of the market delivering a social tariff. There are two parts to this issue and it is a complex one that is not about just the price that vulnerable customers pay for their fuel. It is also about how efficient their homes are and whether all that is being heated is the air above their roofs and about the pounds that such customers have in their pockets. For example, as suppliers, we will be spending £2.5 billion over three years on the energy efficiency commitment that is now going into the next phase, called CERT.
We have the problem that we are trying to focus our spending on priority groups, but we are not sure exactly who they are. We have made a big ask of the Department for Work and Pensions in saying that, one way or another, we and our customers would benefit from sharing information. It could be that we give the Department the information and it tells us which of the customers are vulnerable or it could be the other way round. However, one way or another we need to bottom this out because there is a real gap.
There is also the issue of unclaimed benefits. Work that we have been doing with Help the Aged and the London School of Economics suggests that there is £50,000 in unclaimed benefits over the lifetime of a pensioner. These are really big numbers that we need to work on with Government. It is a bit of a clichÃ(c), but we need joined-up government. We have a social tariff, but it is right and proper that politicians, regulators and everyone else put pressure on all suppliers in this respect.
Rupert Steele: Just to add something from the point of view of Scottish Power, we have quite recently launched a social tariff, but we do not see that as the only part of our activity in this area. For example, we have set our pre-payment standard prices below our standard prices for regular payments. We have also done a lot of work through our trust-on-benefit entitlement. We have found that for every pound that our trust spends on benefit entitlement checks, we recover £20 of unclaimed benefits that people should have been receiving. There is a total of about £9 billion per annum of unclaimed benefits. Making a dent in that would make a huge difference to the amount of fuel poverty. We are pursuing that initiative, and there is a lot that we are doing in competition with each other to show that we are the best in this area.
Can I go back to the issue of carbon capture and storage, particularly in relation to coal? I will then move on to discuss nuclear energy. The Greenpeace submission to us said, “New coal plants should only be approved when they are fitted with carbon capture and storage technology that is demonstrated to work.” There is a world of difference between being carbon capture-ready and having technology that is proven to work.
It is my understanding that E.ON is looking to have Kingsnorth up and running by 2012. A requirement for such a technique would presumably knock that back until 2017 or perhaps beyond that. Given the energy gap that is opening up and the fact that most of our coal-fired power stations are coming out of commission, what would be the impact on our ability to fill the energy gap if we were to require new coal-fired power stations to have proven CCS technology, rather than to be CCS-ready?
Sara Vaughan: That is a hugely important question. The way that E.ON looks at it, there is an energy gap opening up. We have all seen figures that are being bandied about about a third of the plants being off the system by 2020. Nuclear energy will not be able to fill the gap within that immediate time scale.
We have the challenge of 15 per cent. of our energy coming from renewables, and our belief is that that 15 per cent. of energy translates into 45 per cent. of electricity. If we are looking at offshore and onshore wind farms, that sort of electricity will be intermittent, because the wind will not blow all the time. You therefore have to have some sort of back-up—some sort of stand-by, peak electricity—to fill the gap. Our belief is that that should not just be gas; we should not put ourselves in a position where we are wholly reliant on gas to fill the gap.
We are therefore also looking at coal, renewables and wind—we are looking at the whole picture. In terms of our coal, we are looking at replacing about 3 GW of what one might call the less efficient coal plant with Kingsnorth—1,600 MW of supercritical coal, which means that it is cleaner, more efficient coal. At such time as we are able to fit CCS to it, we will do so. That is a very long answer, and I could probably more easily have said, “Yes, I think there would be a problem if we were not able to use coal.”
Thank you. Let us move to the nuclear side of things and the other aspect of the energy gap. The Secretary of State has said that he hopes that the first nuclear power plant of a new-build programme could be up and running by 2018. Do those of you in the room—most of the companies that might be interested in building such plants are represented here—think that that is reasonable? What must be done for that to be achieved? What clarity do you need on the price of carbon and on the nuclear waste disposal regime? What further resources does the NII need to be able to approve the different types of reactor that are being submitted? Do you think that the 2018 target is achievable?
Denis Linford: We think it is achievable; indeed, we believe we can, as a potential investor, commission a new station by the end of 2017. There are lots of things to be done, of course, including design assessment, which depends to some extent on the NII having sufficient resources, but we believe that steps are being made in the direction of ensuring that it does. There are a number of other things, such as reforming the planning regime so that there is a national policy statement that is taken into account by the infrastructure planning commission. There are a number of steps like that, and the carbon price is just one element of what we will take into account when we assess the business case for making the investment. However, there is time to do all those things and to construct a new nuclear power station by 2017.
How do you assess the carbon price when it goes up from a few cents a tonne to €30 a tonne? Do you need a floor in that process to make the calculation work?
Denis Linford: As I said, we will have assess this at the appropriate time. We are assessing the impact of the reforms to the emissions trading scheme on the carbon price and we hope that that market will develop and strengthen between now and the time when we have to make a decision. The Government have reserved the option of introducing a UK measure to strengthen the effect of the emissions trading scheme, and we will have to see whether that is needed in due course.
Rupert Steele: From our perspective, we see a substantial programme of work ahead in terms of the design-type approval and sorting out waste and decommissioning, justification and all the things that were set out in the Government’s White Paper. We think that the Government have identified exactly the right tasks to make this option viable, and what we now need to do is to make sure that it is actually delivered.
When will you need to know the carbon price to make that investment decision? When will you need to know about the nuclear waste disposal regime to make that decision? It would be helpful to know the year.
Denis Linford: I should have mentioned the waste. Clearly, we must all have plans in place and approved in accordance with the Energy Bill for decommissioning and waste management. We must have those plans approved when we get consent for the station. Those plans will have to be drawn up over the next couple of years in accordance with the Act, and the guidance that will be put in place to support the Act.
Lady and gentlemen, I have been impressed by your line that competition and the marketplace are important, but that goes in line with the fact that you put your prices up together and on a similar basis, so you are obviously working well in tandem. Can you comment on the fact that you say that competition is a primary consideration and that market forces are important? At the time that we are talking about, there are no subsidies for nuclear development and the amount of money that has been ploughed into renewables already with very little return has not exactly been a winner for the Government, so should we allow, or do we need, the same competition, as in market forces, to apply to all forms of energy, and not just to nuclear energy?
Dr. MacLean: Can I just make one point? Scottish and Southern Energy has not put up its prices, and has stated publicly that it will not do so during the winter this year. It has almost doubled its customer numbers over the past five years by offering attractive prices and having a price policy that pretty much says that we will be the last or among the last to put prices up, and the first or among the first to put them down. At the moment, that means that for many customers there is £100 or £150 difference between our prices over a year and those of other companies. The proof of the pudding is in the eating, and we have increased the number of customers by nearly 8.5 million. We have become the second largest supplier on the basis of competition, so I believe that it is working.
You mentioned Scottish and Southern. You are doing really well, and you have done all that, but 0.6 per cent. of your turnover is used for research and development. Is there a reason why you do not want to get involved in research and development, and why you do not plough money into renewables? Do you think it would be advantageous to introduce something into the Bill requiring a minimum amount of turnover to be invested by companies?
Dr. MacLean: We certainly recognise the need to up the ante, and the spend on research and development. We are exploring a number of ways of doing that. We recently picked up the sponsorship of a chair of renewable energy at Exeter university, and we are working with a number of other universities, particularly in Scotland, to see what we can do to further research and development in that field.
You mentioned renewables, in particular, and no one could say that we are not prepared to put our money where our mouth is with regard to renewables, having recently spent more than £1 billion buying Airtricity, which is a 100 per cent. renewables-focused company. That underlines both our belief that renewables are a sensible and substantial part of the generation mix going forward, and our determination to develop the technologies and supporting infrastructure to ensure that they work and deliver.
Guy Johnson: In terms of renewables, we operate the first major offshore wind farm in north Wales. We are also seeking to rapidly expand our renewables business. We are seeking in particular to operate a 90 MW capacity wind farm on Rhyll flats, on which construction has started. The cost of that project, however, is about £190 million. We are also seeking in the longer term to operate a substantial wind farm at Gwynt y Mor. That will produce 750 MW and the cost will be £1.4 billion. There is no delay or lack of willing on our part to expand our renewables business. Indeed, we have publicly stated that, from 2008, our group as a whole will spend £750 million a year on its renewables business. I know it is not a matter for the Committee today, but the issue for us is particularly one of planning where we are suffering substantial delays in that programme.
Sara Vaughan: Probably like the other companies at the table, we are also looking at investing and we are investing considerable sums of money in renewables. Picking up on your other point, like EON, we are also investing a lot of money in research and development, both through the Energy Research Partnership, which is co-chaired by our CEO, Paul Golby, and also through the Energy Technologies Institute which is a 10-year £1.1 billion public-private partnership initiative. We recognise the importance, therefore, of research in improving the industry, looking at how, for example, we can improve the efficiency of renewable energy going forward. It is certainly something that is very high on our radar screen.
Order. I am interrupting at this point because, as I said earlier, questions should be relevant to the scope of the Bill and in answering questions perhaps the remaining witnesses can relate their plans to whether the Bill encourages or discourages them from implementing them. Could we focus on the clauses in the Bill?
I interrupted you, Mr. Johnson.
Guy Johnson: The only comment I would make in this area is that we have some concern about the transmission regime as it will apply to the offshore wind activities. Our concern is not in relation to that scheme per se, but is in relation to the transitional arrangements. The concern is very much one of delay to the extent that a programme that involves existing assets or assets in the course of construction has a property scheme or buy-out arrangement imposed upon them in the event that commercial negotiations do not prove fruitful. We ask that there should be as much clarity about that as soon as possible; otherwise the risk in relation to the transmissions sections of the Bill for offshore energy is that there will be further delay in the construction of wind farms.
Ofgem has estimated that all your Christmases have come at once and that over the next few years you will get a £9 billion collective windfall courtesy of HM Government under the next phase of the EU emissions trading scheme. Would you object to us taking all or some of that back to use for some of the things we have been talking about?
Rupert Steele: We do not accept that number or indeed necessarily the concept that the emissions trading scheme has led to a windfall. It is simplistic to add up the value of the allowances and say that it is a windfall. There are two reasons for that. First, it is clear that a number of generation projects went forward as a result of the Government’s announcements about the ETS phase 2 some years ago. Those projects will contribute to higher generation levels, better generation margins and a more stable grid and therefore fewer peaks in the wholesale electricity price. Secondly, the evidence that we have given to a Select Committee makes it clear that we look, among other things, at end-to-end costs in setting our prices. That again will reduce the upward pressure on pricing. In our view, a substantial part or perhaps all of the value of the allowances will, in a competitive market, find their way to customers. We therefore do not think that the suggestion made by Ofgem is appropriate.
Denis Linford: Just to reinforce the point, on this end-to-end process, in a competitive market, we can only reflect the costs we incur and not some possible opportunity cost. We are actually going to get fewer allowances in phase 2 and so buying the allowances we need in addition to those that we are given will actually mean higher costs.
Guy Johnson: The risks are obviously the risks that I have referred to in relation to the £750 million pounds a year that we are going to invest in renewables; if we look at our investment programme over the next 10 years or so we are talking about something of the order of £8 billion. At the moment, thankfully, we have the majority of the renewables spend being made in the UK and we hope that that will continue. Obviously what have to be weighed up are the risks in relation to that, coupled with the sort of proposals that you might be talking about. I do not know what the answer to that is.
Perhaps I can move on to the renewables obligation section in the Bill. Ofgem will be giving evidence later, so I will put to it that its suggestion is simplistic and ill-informed.
Are you, in principle, in favour of the banding of the renewables obligation? Is that the right strategy? Is there a danger that it becomes Governments choosing technologies and being a bit rigid and over-prescriptive? You want long-term certainty and yet a Government can, by regulation, change any of the bands, any of the relativities and any of the technologies that renewables obligation certificates apply to. How do you view the Bill’s proposed banding of ROCs?
Sara Vaughan: We would have preferred the renewables obligation to remain technology-neutral, with specific support being given to emerging technologies rather than having the banding that has come about. That was our position. However, we are where we are and therefore will now work within the provisions that appear in the Bill.
Can I just press you on that for a second? In a sense we are not where we are because it has not happened yet. The job of the Committee is to make sure that the right thing happens. You might be sceptical of our ability to change the Bill, as am I, but we will give it a try. If you were sitting where we are sitting, what would you change?
Dr. MacLean: Can I suggest that in some ways it is almost just a theoretical discussion at the moment? Since the Bill was published, we have had the European Commission’s proposals for renewable energy and, as Sara rightly says, the 15 per cent. all-energy target is estimated to mean 45 per cent. renewables. That is a completely different ball game from where we were. It is a tenfold increase in the overall renewable energy position for us and a threefold increase in the target for renewable electricity. I do not think that even changing to banding, which we opposed in principle, is going to be able to deliver what is needed.
Unfortunately we are back into yet another review situation where any clarity that there might have been is going to be removed. In all probability we are going to be looking at yet another legislative process to deal with how we are going to achieve the new targets. The overall plea that I would certainly make is that we achieve clarity on that as soon as possible, because the time scales are incredibly challenging.
I would just highlight that point with a project that we have been working on: the Beauly-Denny transmission upgrade, which is one of the important infrastructure developments that is required to deliver renewables. We started serious work on that in 2001 and at the moment we are unlikely to see it up and running until about 2013. So you do not need to add up an awful lot to work out that if we do not push the button on renewable generation and the supporting infrastructure, there is no way that we can deliver in 2020. The challenge now is to see how we can get clarity in a way that does not block what is already happening and will maintain the delivery of what is already there, and how we can accelerate that through things such as planning. The main thing is not to create a scenario in which we get more uncertainty, and people waiting to see what is going to come out of the next thing and the next thing before they act.
Given that the problems the Bill is designed to address are fairly universal across the western world and that the majority of you represent international companies that can invest in any part of the world at any time, do you broadly welcome the aims, goals and provisions of the Bill?
So will you require, as part of the long-term stability and certainty that you require to make long-term investment decisions, a broad lasting political consensus from this place on the provisions of the Bill?
With that in mind, would you be at all interested in making any investment whatsoever in nuclear electricity generation, if it were the view of Parliament, and the Government and parties within it, that it should only be pursued as a last resort?
When it comes to making your investment decisions on nuclear, will you require a fully operating deep geological depository before you are minded to invest or not?
Denis Linford: The Government have a process for dealing with waste, and, as I understand it, there will be a White Paper on the creation of the repository, presumably setting out the process and the steps that will be taken to achieve that. As long as that is clear, and progress is being made towards it, that should provide sufficient reassurance.
Rupert Steele: Just to add to that, in practice there will not be any need to ship waste to a repository for quite a number of years after the investment decision about a nuclear station. As long as we can see that the process is in hand, actually having the repository open is not necessary at the time of the investment decision.
Several of you have touched on what I would call the nuts and bolts of this, and that is the planning system. I was interested to hear that you felt you could have a new nuclear power station facility up and running by 2017. There is a crossover with the Department for Communities and Local Government. A Bill dealing with strategic infrastructure is currently being considered. How confident are you that there will be engagement, so that if the Energy Bill is to move forward in whatever form it is refined in Committee, planning will not end up scuppering what is supposed to happen? Recently, there have been criticisms in reports that the DCLG does not communicate its vision outside. You may have the aim of having a power station by 2017, but planning permissions may not be forthcoming. Are you confident that there is enough strength in the Bill to deliver what you think will be needed for our future energy, dovetailing with planning?
Denis Linford: The Planning Bill going through the Commons will create the infrastructure planning commission and national policy statements. As I understand it, there will be a national policy statement for nuclear, based on the White Paper and the strategic siting assessment that will be carried out over the next couple of years. With that, and with the need to consult people affected by our projects, we think that process can work and that we can get consent in time.
Rupert Steele: If enacted, the Planning Bill will undoubtedly be extremely helpful in enabling the industry to make the kinds of investment in a variety of different technologies that are going to be necessary to meet the supply gap, get the grid developments made that are necessary for renewables to continue to grow, and, if appropriate, invest in nuclear. So it is a hugely important Bill and I am confident that the people in the Government machine who co-ordinate these things are aware of the important link between that Bill and this one.
Guy Johnson: The difficulty that we are all struggling with at the moment is the current system. I talked about the Gwynt Y Mor example, where we put in a section 36 in December 2005, and you can see the frustration at the moment. I absolutely agree that the Planning Bill will considerably improve the current arrangements.
Dr. MacLean: Could I just raise one other issue? Energy policy remains a UK reserved matter; planning is devolved. We are now seeing energy legislation or energy policy moving into planning legislation in the form of the national policy statements, and they will not have the same primacy in the planning system in the devolved Administrations. This is a particular issue for renewables, where so much of the resource is in Scotland, and so much of the delivery is expected to come from Scotland. It is essential to find appropriate ways of ensuring not only that there is joined-up thinking between the Energy Bill and the Planning Bill, but also that there are appropriate solutions to join up the approaches in the devolved Administrations so that we do not find that energy policy is being set by planning policy, which is one of the dangers we have at the moment.
I think you are a little bit optimistic to think that the Energy Bill is going to solve all the problems of local planning, particularly with the commissioning of new power stations and so forth. I should think there will be tremendously contentious decisions that will drag on for a long time.
Regarding the point made on offshore wind farms, have you altered your thinking or been in discussions with the Ministry of Defence, following the reports about the interference that offshore wind farms could cause to radar and air defence?
I am going to dot about on subjects a bit. In the Bill, the nuclear operators have to meet their share of clean-up costs, and we do not know what they will be, so there is a provision for a margin of uncertainty—an element of risk just to make sure. Clearly, the Government could make sure by making that margin huge, but that would be unattractive to you as investors. On the other hand, they could make it very, very small and you would want to invest, but the taxpayer would run a risk. Do you have a view as to the optimal size of the scale of the margin of risk that the Government should allow, that would encourage you to invest but would not leave the taxpayer unnecessarily vulnerable?
Denis Linford: I think it is too early to say. There is clearly going to be detailed guidance issued and consulted on shortly, so we will see more detail of this over the next few months. No doubt we will be discussing with the Government what those cost estimates are and what margin for uncertainty there should be. It is a bit too soon to say what the right outcome should be, but clearly, from our point of view, it would be helpful to have a fixed price with that margin to protect the taxpayer.
Denis Linford: The long-term liabilities are not a very big element of the total cost, so one should not over-emphasise the importance of those costs in the investment decision. We think that only about 5 per cent. of the total cost of a nuclear station over its whole life is accounted for by those long-term liabilities. However, we clearly need to get this right in consultation with the Government.
Rupert Steele: Obviously, I do not think that it is the Government’s intention to set the margin at a level where it becomes a money-spinner. It needs to be set at a prudent level that gives the taxpayer a good degree of protection. Clearly, at some point if it is inflated just for the fun of it that would start to affect investment decisions and we think that that would be wrong.
The other point that I would make, of course, is that the new arisings of waste from a new nuclear programme would be much easier to handle than the legacy, because we are all very, very focused now on nuclear waste issues in a way that the people who initially built Sellafield in the late 1940s perhaps did not have at the top of their minds, for reasons that we all know. I think that one just needs a little perspective on this issue.
The Bill has some provisions about metering, but relatively minor ones. Obviously, we have had some discussion about smart metering and the roll-out of it. My worry about some of the models on rolling out smart metering is that five or six of you all turn up with your own individual vans to your own individual customers installing your own individual smart meters in the same road. Is there a way of avoiding that happening while still getting a rapid roll-out?
Barry Neville: Absolutely there is. There have been a number of models developed to try to get around that problem. What you do not want is British Gas turning up and doing Nos. 2, 4 and 7, and doing gas in one, electricity in the other and dual fuel in the next one. The desired outcome is really one company going in through that road and fitting one meter that is able to speak to a meter in the north or the south or the east or the west. I think that that is the position that the industry is trying to get to, so that you can get the cost efficiencies of that type of roll-out.
I think that you would also get further benefits, even in terms of public education, because if you get the opportunity to go down, street by street by street, there are other things that you can do when you are in the home: energy efficiency advice, benefits and health checks. This is a real opportunity that I think that the Government should take. I think that the Government are well aware of the situation, but I think that we are looking for something further in this Bill, such as the mandation of metering that will give it the kick-start that we need.
Dr. MacLean: It is important to recognise what needs to be rolled out, and the difficult part is the basic infrastructure around the telecommunications to make the two-way link and some sort of base unit into which various other things can be plugged. You can have plenty of competition around what you plug into, but you have to get that base unit in there. We believe that, at the moment, a real opportunity has been missed to take the enabling powers in the Bill that would allow a mandated roll-out. If we had that there, we could then work in parallel on the options for how best to do that roll-out, but for a lot of it there are not a lot of options; we just need to get on with it and put that basic infrastructure in place. We need to get moving with that roll-out. We would like to see that in the Bill.
Sara Vaughan: Just to reinforce that point, part of the reason for that is that we think that trying to do it under the European Communities Act 1972 will not work because its powers are not wide enough, because the provisions of the energy services directive, which would enable it, do not completely cover the point.
At the end of the day, you may acknowledge Government targets but I guess that you will do what the law requires you to do or what the market drives you to do. Given what you know about the market, do you perceive that we have the legislative framework in place with this Bill for you to hit the Government’s target on renewables? I am not talking about the Commission target because Dr. MacLean has already said that he does not believe that we can hit it. However, is the Bill sufficient to ensure that we hit the existing Government targets?
Rupert Steele: The Bill probably contains the right provision, give or take some minor points of detail. However, there are some things that could prevent delivery. The most important of those are grid connection and planning. The banded renewables obligation provides a framework that can support the roll-out of renewables financially. It will have to be extended in time and level to get beyond the 15 per cent. or so that we might reach by 2015 because there will be insufficient years left to fund the lifetime of projects. However, the key constraints are getting these renewables connected and getting planning permission to install them. The delivery of renewables is fundamentally dependent on addressing those two issues.
Dr. MacLean: I would probably also say yes, the Bill can help to hit that target in conjunction with the Planning Bill and in conjunction with something similar being done in Scotland. There is the proviso that we believe that the transmission arrangements are inappropriate, particularly to do with access and the codes structure for dealing with that. The initial work that is being done between the Department for Business, Enterprise and Regulatory Reform and Ofgem is already beginning to recognise that there may need to be legislative changes to ensure access. Again, on the basis of the European Commission statement on priority access for renewables, we must ensure that those that have got planning permission can connect to the system and that others are encouraged to do so.
I am generalising, but given those caveats, you have basically said that the Government have hit the right mark with the Bill in terms of renewables. Changing the question slightly, in terms of the Government’s desire to cut carbon, will the market and this legislation allow us to hit the carbon target?
If in the Climate Change Bill there is a 60 per cent. carbon target—or possibly an 80 per cent. target, if those people who are pressing for it get their way—is there any way that that could be delivered without a significant nuclear component? If that is the case, do the legislation and the market point us in the direction of delivering that target?
Dr. MacLean: The big thing in the carbon reduction equation is to recognise that we must take two parallel approaches. The first is to manage and reduce our consumption and the second is to decarbonise the residual supply of that demand. There is usually far more focus on the latter than on the former approach of getting the demand side to be better managed. That happens across the whole package.
We are talking about an energy Bill, but we have talked almost exclusively about electricity. Heat is another important aspect in reducing carbon and in hitting the renewables targets. We feel that the Bill could have done more to introduce incentives for renewable heat. At the moment, there is a perverse incentive to develop solutions for electricity rather than for heat. Quite often, it would be better to channel that investment into a heat solution rather than an electricity one. We need to get to grips with the demand side. We need to make sure that we are looking at energy across all its facets. In that respect, there are gaps in the Bill that will need to be filled at some time in the near future.
Just to come back to what Dr. MacLean said about constraining demand, I suspect that some of our witnesses later today or in the next session will tell us that if we had loads more energy efficiency, we would not need nuclear. My quick mental calculation—if this is wrong, forgive me—is that if the economy grows by 2 per cent. a year between now and 2050, the economy in 2050 will be about two and a third times the size that it is today, so even if we put in place energy efficiency on a scale that could constrain that, it is likely we would still need as much energy in 2050 as we are producing today, perhaps even more.
Sara Vaughan: There are also some solutions that may involve the need for more electricity. For example, if you are looking at something like zero-carbon homes, you cannot capture the carbon that is emitted from a gas boiler, so you have to be looking potentially at some sort of electrical heating, but doing that from what is a zero-carbon source. If we are looking at the transport sector and perhaps at transport that is fuelled by hydrogen, again that would entail a large electricity demand in order to do the conversion. Energy efficiency, as Keith said, is part of the mix, but no, it is absolutely not enough on its own.
So given all the effort that will have to go into meeting that target, which I am sure we will come back to one day, the reality is that if we want to start producing hydrogen and moving to a hydrogen economy, there will have to be an even bigger component from nuclear energy than we currently envisage.
Dr. MacLean: On renewables, hydrogen could quite easily be produced by any of those. I do not think the issue is producing the hydrogen. I think there are a couple of chemists among us here who will have done that a few times in our lives before. The problem is the storing and transporting of hydrogen, which is a much bigger challenge.
Dr. MacLean, you were talking just now about the elements of the Bill that you felt had been overlooked in terms of renewable heat. Could you write to us to give us more detail about what you feel should be included in that respect?
Thank you for a brief question and an even briefer answer. I thank our witnesses again for attending and answering questions. That brings us to the end of this morning’s session.